Ahead of the CPI data release, traders are pricing in a 50% probability of a September interest rate hike, while Treasury market pricing leans toward expectations of moderate economic data.

Based on swap market trading activity, traders currently assign a roughly 50% probability to a 25 basis point rate hike. After July’s non-farm payrolls data unexpectedly weakened, Wall Street has priced an almost 50/50 split on whether the Federal Reserve will raise rates by 25 basis points in September. The Fed led by Walsh has significantly scaled back forward guidance, forcing markets to rely again on hard data to determine its policy path. The impact of July’s CPI is highly asymmetric: moderate inflation data can further undermine the case for rate hikes, while hotter-than-expected data could quickly push a September rate hike back into the baseline scenario. For the 10-year U.S. Treasury yield—often called the "anchor of global asset pricing"—the current risk-reward in the bond market has clearly tilted toward pricing in a sharp decline in yields driven by July’s moderate CPI, mainly because macro data and CTA bond market positioning are creating positive resonance. (Zhito Finance)